Leslie Mittelberg is considering the wholesaling of a leather handbag from Kenya

Question

Leslie Mittelberg is considering the wholesaling of a leather handbag from Kenya. She must travel to Kenya to check on the quality and transportation. the trip will cost 3000. the cost o the handbag is $10 and the shipping to the US can occur through the postal system for $2 per handbag or through a freight company which will ship a container that can hold up to 1000 handbags at the cost of $1000. the freight company will charge $1000 even if less than 1000 handbags are shipped. Leslie will try to sell the handbags to retailers for $20 each. Assume there are no other costs or benefits. A) what is the break-even point if shipping is through the postal system. B) how many units must be sold if leslie uses the freight company and she wants to have a profit of $1000? C) at what output level would the two shipping methods yield the same profit? D) suppose a large discount store asks to buy an additional handbags beyond normal sales. Which shipping method should be used and what is the minimum sales price Leslie should consider in selling those 1000 handbags?

Explanation / Answer

Let X be the number of handbags sold.
Profit on a handbag sold through postal service is 20 - 10 - 2 = 8 (costs 10 to make the bags and 2 to ship them, sells bags for 20)
Total profit on handbags through postal service is:
-3000 + 8X
Total profit on handbags through freight is:
-3000 + 10X -1000 = -4000 + 10X
A. To find the breakeven point by post, solve for the equation:
-3000 + 8X = 0
8X = 3000
X = 3000/8 handbags sold, by post (you need to do the division yourself - all answers are left as fractions for you to complete)

B. To find the number of handbags for a profit of $1k, solve for the equation:
-4000 + 10X = 1000
10X = 5000
X = 5000/10 handbags

C. To find the number of handbags for equal profits, set the two equations equal to each other and solve for X
-3000 + 8X = -4000 + 10X
2X = 1000
X = 1000/2 handbags

D. Shipping by freight saves her 1000 compared to shipping by post, if she is shipping 1000 handbags. The 1000 handbags should be sold for a minimum of (Cost + shipping per bag) to simply break even on the bags, and they should be sold for a minimum of (Cost + shipping per bag + $x per bag) to guarantee profits of $1000X. Cost is $10, and shipping by freight costs $1 per bag.

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